When we checked in last year with Patrick Smith, a hop and apple grower in Yakima, Wash., getting his workers vaccinated was his main concern.
Since then, inflation has reached its highest level in 41 years and employers continue to raise wages to attract workers. Smith said his salaries at Loftus Ranches have increased 7% this year, but that’s on the lower end of his cost increases. Some fertilizers have more than doubled, he told “Marketplace” host Kai Ryssdal, and the strong dollar is reducing revenue from the hops he exports to Europe.
The following is an edited transcript of their conversation.
Kai Rysdal: Patrick Smith, it’s good to talk to you again. It’s been a long time. It has been a long time.
Patrick Smith: Yeah. Yeah. It’s good to talk to you too.
Rysdal: OK, it’s been a year and a half. First, the standard warm-up question: how’s business?
Black-smith: You know, we hang in there. And, you know, we have our challenges related to some of the macroeconomic things going on that I’m sure we’ll talk about. But overall the beer is still a bargain. People still eat fruits and vegetables. And yeah, so overall I don’t have much to complain about actually.
Rysdal: Alright, fine, fine. First of all, this is good news. Now, let’s break down macroeconomics and the things you grow. Hops, first of all, obviously you also run a brewery. Do I remember you telling me at one point that you sell a lot of your hops in Europe, right?
Black-smith: Yes that’s right. About a third of our total production is sold in Europe.
Rysdal: OK, so let’s do some change here. And as you well know, the dollar and the euro are damn close to parity. I don’t know where they are exactly now, but it’s pretty close to one-on-one. it can’t be good for your company on contracts that I imagined having been signed when the euro was not at parity.
Black-smith: Yeah, I think our weighted average contract price in Europe is somewhere between, you know, $1.13, $1.15 [per pound]. We have expenses there in Europe, personnel and, you know, logistics and stuff like that, which we can pay with the income we receive in euros, but when we bring what’s left back to the United States here, of course, we receive 10-15% less money than before.
Rysdal: It doesn’t seem like a viable business proposition.
Black-smith: It’s hard. But part of the risk of doing international business is currency risk, of course. And so we do covers and stuff like that to help minimize our exposure. But certainly for exporters like us, you know, this significant dollar strength has an impact on our ability to compete in those markets.
Rysdal: OK, so the monster under the bed, inflation, what does that mean to you, a guy who runs a family business, a farming ranch in Washington’s Yakima Valley?
Black-smith: Yeah, I mean, it affects us, actually. You know, our salaries are up over 7% this year over last year, and, you know, other major cost categories for us. In some cases, some fertilizers are almost double from what they were just a year or two ago, and, you know, when I look at our top four or five cost categories and salaries go up by 7 %, that’s the lowest end of the increments, you know, that cuts the margins down a lot for us.
Rysdal: What is your ability to pass costs on to consumers?
Black-smith: Yes, it is really limited. And, you know, in general, farmers are price takers rather than price makers. And –
Rysdal: So that means you have to take whatever price you can get, basically?
Black-smith: Yeah. Many of our products are easily replaced by products from other parts of the world or other parts of the United States. And so a lot of our multi-year contracts that were signed when inflation was, you know, 2% and we built our kind of five-year plan on 2% inflation, and now with the inflationary pressures where they are, it certainly looks a little less appealing than it did two or three years ago.
Rysdal: Overall, Loftus Ranches, how are you doing? Are you hanging on? Do you grind it? What are you doing?
Black-smith: Yeah, you know, I think overall we’re doing well. You know, every year has its challenges. I mean, what we talked about two years ago about all the challenges we were having with our workforce and COVID and what it was doing, and now it’s a new challenge, but in the together we are doing well. We are well.
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